After years of surging profits, Wal-Mart Stores Inc. are now finding growth increasingly difficult to come by.

Although this past week Wal-Mart reported fourth-quarter earnings were up 13.4 percent, its stock slipped as revenue fell short of Wall Street projections, and its profit outlook also disappointed the market. The stock ended the week at $45.45, near its 52-week low of $42.33.

With close to 4,000 stores nearly saturating the U.S market, however, the company believes that to grow it must change its strategy, not open more stores.

Economic slowdown coupled with the strain of higher energy prices has impacted Wal-Mart's core customers, directly affecting the company's bottom line. In an effort to combat this, the company is branching out to court upscale consumers, offering a broader selection of higher-end items and sprucing up its stores.

We went the wrong direction, Wal-Mart CEO Lee Scott said earlier this year, reflecting on the failure. You can't just spend all your time chasing a customer who is going through that economic cycle.

The new direction, however, puts the retailing Giant on a collision course with its smaller rival, the number two retailer, Target Corp. which has spent several years remaking it self as the higher-end discount retailer.

Target: Been There Done That

While Wal-Mart has traditionally focused on delivering the lowest-prices, Target has differentiated its stores by offering more upscale, trend-forward items on top of the bargain prices

Inking partnerships with designers such as Mossimo Giannulli, Mark EKO, and Eddie Bauer, Target has honed its brand to mean cheap and chic. Even as other retailers have tried to follow a similar path, Target's efforts to integrate its brands through marketing and store placement have been successful in raising the company's cachet.

By positioning itself as a trendier retailer and offering designer goods that retailers such as Wal-Mart don't have, Target has seen average earnings per share grow between 10 to 20 percent over the past 10 years.

This sales growth reflected better than average performance in most non-discretionary categories like health and beauty, pharmacy and consumables, Target's President Gregg Steinhafel said after the release of the company's latest earnings report, noting more discretionary categories like apparel, house wares and electronics, have also grown.

These discretionary items have allowed Target to flourish amid an economic slowdown, cashing in on a time when customers are willing to trade down to save money. Same store sales in the most recent quarter increased 4.6 percent while Wal-Mart grew only 2.4 percent in the same category.

The unique merchandise has also helped Target evade Wal-Mart's competitive prices which was a factor in forcing former rival K-Mart into bankruptcy. Now, however, the number one retailer is now going after customer's similar to those at Target.

Wal-Mart Prices Movin' on Up

The move is no surprise. Executives have openly spoken about their drive to find new customers. Wal-Mart's more affluent focus was directly addressed during the Emerging Trends in Retailing Conference in Fayetteville, Arkansas.

Consumers with less income shop a greater percent of the store, Wal-Mart CEO Lee Scott said. As income goes up, the percent of the store shopped decreases. This is Wal-Mart's focus for growth with better goods.

Like Target, Wal-Mart is changing its marketing and store layout designs. It has even teamed up with fashion designers after concluding that their current customers were starved for fashion.

The company has moved its line of trendy, British-designed apparel, George, to prominent, front-of-store boutique areas on top of simulated-wood floors. It also rolled out a line called Metro 7 last year, marketed as a distinct line of women's apparel designed specifically for the fashion-savvy customer.

The culmination of Wal-Mart's efforts, however, was unveiled in Plano Texas last March, with a 203,000 square-foot affluent super center catering to well-heeled consumers. The store features an expanded selection of high-end electronics, more fine jewelry, 1,200 types of wines, high-end coffee and even a sushi bar.

The store will serve as the company's test-bed, where management intends to try out new strategies and tactics.

With the opening of this store, Wal-Mart is adopting an active approach to understanding and meeting customer needs, particularly those of the selective female shopper, said John Fleming, executive vice president a

"At our Plano store, our gross profit per linear foot is 24 percent higher than the average store. Fleming said at Wal-Mart's shareholder meeting in June.

For now, the company's strategy will be to continue adding products to its stores that will boost the company's bottom line.